'Listed companies likely to register double-digit earnings growth'

After four years' flat earnings, the listed companies' profits are likely to post double-digit earnings growth of 20 percent in 2011 that would lead the market to achieve the index target of 14,000 points this year, analysts said. This earnings growth will be led by energy and banking, followed by cement and consumer sectors, they added.
"Where robust foreign buying remains the major attraction for local bourses, corporate earnings is the other major factor that will cheer market players this year", Farhan Mahmood, senior analyst at Topline Securities said. "Our 20 percent earnings growth estimates for 2011 exclude heavyweight OGDC, which is misleading the index", he added.
However, besides international crude oil price and interest rates, other risk factor for corporate earnings this year would be the new taxes whether it could be one-time flood tax or asset tax on corporate sector with a view to finance burgeoning budget deficit, he said.
"We believe that earnings growth in FY11 will be robust at 20 percent which will continue in FY12 and FY13 albeit at a lower pace due to below average GDP growth and non-resolution of the circular debt issue", he said. After FY11, earnings growth will stabilise at 10 percent, resulting in three-year average annual earnings growth of 13 percent, in line with the inflation expectations. This earnings growth compares favourably with last four years' average annual earnings growth of only 4 percent (average inflation 11 percent). However, next three years' earnings growth of 13 percent is still less than last 10 years' average growth of 16 percent (with 10-year average inflation of 9 percent).
After a decline of 21 percent in E&P companies' profit in 2010 (based on Topline Universe, excluding OGDC), E&P sector is likely to post impressive earnings growth of 41 percent in 2011. This is primarily due to both higher crude prices and rising oil and gas production. Moreover, banks are expected to come with a vengeance with lower provisioning and improving net interest margin (NIM), thanks to rising lending rates. Similarly, recovery in cement sector and consumer sector earnings amid better margins and growing consumer confidence respectively will also support profitability next year.
Regarding new taxes, oil prices and interest rates, Farhan said that most of the investors are worried about new taxes whether it could be flood surcharge tax or the asset tax etc. However, it is not clear yet which kind of tax will be imposed and whether that will be introduced in next budget or it would be applied on one-time ad hoc basis. "Since the benefit of these taxes to government will be different in both cases, the impact will also vary on the corporate earnings we believe", he added.
"Our working suggests that if 10 percent flood surcharge tax is applied for six months, effective January 2011, it will affect annual corporate earnings by two percent", he said. "On the other hand, if the government charges taxes on fixed assets like the one we had under Finance Act 1991 and assuming 0.5 percent tax incidence, it will affect corporate earnings by one percent, according to estimates. In that case, the major hit would be on the manufacturing concerns including cement and fertilizers," he added.
Other than taxes, oil prices would remain the key risk factor. "We have assumed average $80 per barrel oil price for FY11 and if oil prices increase to average $85 per barrel in FY11 corporate earnings growth will be 23 percent while earnings growth will reduce to 18 percent if oil price stays at average $75 per barrel", he said. Similarly, any change in interest rates will also affect corporate earnings marginally. "However, we have already incorporated higher discount rate of 15 percent in our earnings growth projection", Farhan said.